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Home Articles Why ULIPs Are Better Than FD? - (Revised)

Why ULIPs Are Better Than FD? - (Revised)

IndianMoney.com Research Team | Posted On Thursday, June 25,2009, 05:48 PM

Why ULIPs Are Better Than FD? - (Revised)

 

 

"Why ULIPs are better than FDs”. We explained the article by taking few parameters into consideration and those are the actual facts but we didn’t mention it in the article. We think that created confusion in few of you. We would like to clarify those points for your interest in this article. Following are the points illustrated/discussed in this article.
  • Comparison of returns from ULIPs and FDs
  • Comparison of Tax liability on the Contribution to ULIPs & FDs
  • Comparison of Tax liability on the Maturity benefits from ULIPs & FDs
  • Reason for highlighting Birla Sun Life Insurance
  • Clarity on charges in ULIP Plans

Returns on FD

Here we are assuming that Mr. Rahul is investing Rs. 100000 every year for 5 years. In FD we don’t have the option to invest every year on the same account. So Rahul decided to invest Rs.100000 in the first year for 5 years term, Rs. 100000 in the second year for 4 years term, Rs. 100000 in the third year for 3 years term, Rs. 100000 in the fourth year for 2 years term and Rs. 100000 in the fifth year for 1 year term. From the below given illustration you can clearly understand the total return that Rahul is going to receive at the end of fifth year.
 
Income Tax Rate 
 
We are taking the Income Tax rate as 30% considering the annual income of Rahul is more than Rs. 500000.
 
For Five years
 The return received on 4 years FD will be Rs. 1,46,932.80
 
For Four Years
The return received on 4 years FD will be Rs. 1,34,793.55.
 
For Three Years
The return received on 3 years FD will be Rs. 1,24,229.69.
  
For Two Years
The return received on 2 years FD will be Rs. 115,025.25
 
For One Year
The return received on 1 years FD will be Rs. 1,07,000
 
Total FD Returns
  • For 5 year term – Rs. 1,46,932.80
  • For 4 year term – Rs. 1,34,793.55
  • For 5 year term – Rs. 1,24,229.69
  • For 5 year term – Rs. 115,025.25
  • For 5 year term – Rs. 1,07000.00  

ULIP Returns

Below given table will provide you details about the performance of ULIP returns over a period of 5 years.
The return from ULIP is far better than FD. Because FD has generated a total return of Rs. 5,89586.89 during a period of five years. But the returns from ULIP is Rs. 6,60431.18 that is Rs. 70,844.29 more than FD.
 

Tax Calculation on ULIP and FD

Below given table will help you to understand the tax amount on the contribution of FD & ULIP
 
Fixed Deposit Tax Calculation
 
Term
Yearly Contribution
Tax (30%)
5 years
1,00,000
 Nil*
4 years
1,00,000
 30,000
3 years
1,00,000
30,000
2 years
1,00,000
30,000
1 year
1,00,000
30,000
Total Tax Amount
Rs. 1,20,000
 
*If you are investing in FD for a term of 5 years (in tax saving scheme) you will be eligible to get tax benefit on the contribution (i.e. on Rs. 1,00,000).
 
Note: Tax on contribution (Rs 1,00,000) will not be deducted from your deposit. But remember you have to pay a Tax of Rs. 30,000 every year from your income towards this contribution.
 
 
ULIP Tax Calculations
 
Term
Yearly Contribution
Tax (30%)
5 years
1,00,000
 Nil*
4 years
1,00,000
 Nil
3 years
1,00,000
 Nil
2 years
1,00,000
 Nil
1 year
1,00,000
 Nil
Total Tax Amount
Nil
 

The amount you are paying as a premium to ULIP is absolutely free from tax. It means there is no need of paying tax on the amount you are invested in ULIPs (subject to a maximum of Rs.1,00,000).

 

Tax Calculation on Total Returns

Tax Calculation - FD Tax Returns
 
Term
Return
Taxable Return
Tax (30%)
Actual Return
5 years
1,46,932.80
46,932.80
14079.84
132852.96
4 years
1,34,793.55
34,793.55
10438.07
124355.48
3 years
1,24,229.69
24,229.69
7268.91
116960.78
2 years
1,15,025.25
15,025.25
4507.58
110517.67
1 year
1,07000.00
7000.00
2100
104900.00
Total Returns
Rs. 5,89586.89
 
 Tax Calculation - Ulip Tax Returns
 
Term
Return
Taxable Return
Tax (30%)
Actual Return
5 years
 6,60431.18
 Nil
 Nil
6,60431.18
Total Returns
Rs. 6,60431.18
 

Real Returns Analysis

This table shows you the returns on your investments after considering all the tax liabilities including contribution and return.

Real FD Returns
 
Contribution
Tax
Value
Return
Tax
Value
Real Return
1,00,000
Nil
1,00,000
46,932.80
14079.84
32852.96
1,32,852.96
1,00,000
30000
70,000
34,793.55
10438.07
24355.48
94355.48
1,00,000
30000
70,000
24,229.69
7268.91
16960.78
86960.78
1,00,000
30000
70,000
15,025.25
4507.58
10517.67
80517.67
1,00,000
30000
70,000
7000.00
2100
4900.00
74900.00
Total Returns
Rs.  4,69,586.89
 
 Real ULIP Returns
 
Contribution
Tax
Value
Return
Tax
Value
Real Return
5,00,000
Nil
5,00,000
1,60,431.18
Nil
1,60,431.18
6,60431.18
Total Returns
Rs. 6,60431.18
 
While looking at the real returns (Rs. 4,69,586.89) from FD you might feel that it is a wrong calculation. Because the total returns is less than your investment. At the end of 5th year you will receive an amount ofRs. 5,89586.89. But remember on the other hand you have to pay tax on your investments; it is not free from tax. For your easy understanding we have shown it as a deduction from your Returns. But in case of ULIPs your investments and returns are free from tax.

Birla Sun Life Insurance

We don’t have any intention to promote Birla Sun Life Insurance products. We just wanted to show you some of the best performing funds in the market. In this article we have chosen three products of Birla Sun Life (without any bad intention), in our next article it can be HDFC Standard Life, ICICI Pru Life or any other company. As per the Fund Performance report came in moneycontrol.comBirla Sun Life’s fund were in the top position. This is the main reason of choosing Birla Sun Life Products. Below given two tables are the screen shots taken from moneycontrol.com. It has given the return of ULIP for the last 3 years, returns in long term will be much better than this.
 
Some of our visitors were pointing out that ULIPs are not able to generate more return over a period of time and the returns are only around 3% – 4%. To prove the reality we have given the screen shots of returns of two products from Birla Sun Life.

Charges In ULIP Plans

Few of our visitors have commented that ULIPs are charging huge charges on the investments and IndianMoney.com is trying to misguide the investors. But please understand one thing there are two kinds of ULIPs in the market, they are;

  •      Customer benefiting Plans

  •      Agent benefiting Plans
Customer benefiting plans are the one that levies very less charges and provides maximum returns to the investor. Agent benefiting plans are the one which provides maximum benefit to the insurance agents. By selling such kind of products insurance agents will be able to get maximum commission. Because of this reason most of the insurance agents won’t be ready to sell Customer benefiting Plans because in these plans the commission received by agents will be very less. So purposefully they will try to sell the second category of the products to you to get maximum commission. The primary intention of IndianMoney.com is to provide its visitors with all these information and to make them financially educated.
 
See Also: Know About ULIP Charges
 
Obviously there is a risk involved in ULIP but the possibility of earning huge returns is also high. Apart from the returns you will get life cover and Tax benefits under ULIP. So we can tell ULIPs are multipurpose investment avenues.  After all these analysis, now you think which is good investment avenue, FD or ULIP?

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